7 Reasons that VC Said No to your Startup

Raising money is the “Holy Grail” early milestone for a great many entrepreneurs leading software and hardware companies. Even though I’ve been in that position and have done it myself, I’ve always found this phenomenon a bit curious. There is a romantic element to the successful raising of funds – someone loves me (my company)! This is especially true when the investor is that most desirable of all investor types, the technology venture capital firm (VC). Early on that ultimate goal of an exit can look pretty far off at this stage and very daunting. So I guess it’s where you can get some early validation that you’ve done the right time.

But of course you’re giving up a large piece of your upside to raise institutional money, and probably a fair bit of control over your own destiny. I think many early stage tech CEOs underestimate this aspect, when they decide to go down the path of raising outside funding. Of course, there are a lot of business plans that absolutely REQUIRE outside funding to have a reasonable chance of success, or really even get off the ground. But many startup software and SaaS companies targeting niche markets could bootstrap if they were so inclined, often with a more optimal personal result in the end.

But I digress; seeking VC funding is a critical activity at some point in in the life of many if not most tech companies. It’s also an activity with a lot more failure involved than success, even for those that ultimately get funding. The statistic that I’ve heard often is that a technology venture capital firm invests in 1 deal for every 100 face to face meetings that it takes. That’s a lot of no’s to a lot of entrepreneurs. Remember, with many investors you only really get one chance, no matter what they say – so it’s important to prepare upfront to limit those no’s. So let’s take a look at some of the common reasons a VC may tell you “no”.

The technology venture capital firm was never interested in the first place

You may find it surprising that I lead off with this; or that it’s even on the list. But I believe it may be the most common reason of all. There are many reasons that personnel from a venture capital firm might express interest in you, or take a meeting to hear your pitch. Here are some of the myriad possibilities in this category:

Those approaching you or responding to your inquiry are associates of the technology venture capital firm; they are constantly out learning and fishing for potential deals. But that’s a long way from having a decision-making partner buying in, who may or may not have sent the associate on the fishing expedition.

It’s a market or technology space that the firm is interested in becoming educated on, for a variety of reasons, but there is no real interest in your specific business.

The VCs are actually doing diligence for a deal they ARE interested in investing in.

It’s a technology venture capital firm with fully invested funds that hasn’t yet raised new money, so they don’t have any dry powder to invest, even if they truly love your business. But firms in this situation will often remain active and take meetings in an attempt to stay visible and relevant, with the hope that they will be able to raise a new fund.

They are being polite, and are speaking with you because a trusted advisor or portfolio executive has referred them; or they not want to alienate you in case they see the business as more investible down the road.

Frankly, this short list of bullets probably just scratches the surface with respect to reasons a technology venture capital firm may talk to a startup tech company, with no real intention of seriously considering an investment. Because of this, my general advice is to urge caution prior opening up your kimono to a potential investor. Many folks tend to get very eager when an investor shows the slightest bit of interest. Take some steps to protect yourself to the extent you can. Please don’t interpret this advice that you should ask for an NDA. VCs don’t sign them as a rule, and even asking will paint you as a naive newbie that doesn’t understand how the game is played. But do attempt to do your own diligence and pull back the curtain as slowly as practical, attempting to ascertain the real situation as you go. It’s a fine line to walk; it’s important to appear to have the willingness to be transparent to investors. But only REAL investors.

It’s the wrong stage for the them

This could fit into one of a couple of general categories:

It’s too small or big of a round. If it’s a large round, the check you’re asking them to write is too big, or they may see the need to write follow-on checks that they won’t want to write. Or if it’s too small, the VC fund may see the deal as not allowing them to deploy enough of their capital, which can eventually spread them too thin in terms of personnel, resources and focus if they do it often enough.

It’s way too early (they are more risk averse) or too late (they want a bigger chunk of the company for their investment). This isn’t good or bad; many firms specialize in early or late stage investments.

Either way, this is almost always an easy mistake to avoid. Make sure to research the firm’s investment stage focus early on. Unlike many things in this article that may be hard to ascertain, usually you can check on the firm’s stage preferences with a simple visit to their website. If you’re raising a $1M seed round, there is little reason to talk to a late-stage focused fund with $500M to invest.

Doesn’t fit their geographic/tech/market focus

Much like the “not the right round” refusal directly above, this is another “no” you can avoid just by doing some basic research. There are exceptions; some venture capital firm will invest in a wide variety of businesses and geographic regions. But in most cases, there are limitations which are not secrets and easily determined. Firms usually will list what their geographic investing preference or limitations are. For example, traditionally many VC firms based in the Bay Area were only interested in investing in firms an short drive from their office. This was to make it easy to attend board meetings in person and otherwise provide close oversight and attention, and they felt they had plenty of good targets that fit this criteria. Many firms in the US, but outside of the traditional tech centers, will invest over a multiple state area. Others outside the US may invest anywhere in a particular country, but nowhere else. In other cases the limitation isn’t geographic, but vertical. They may be only interested in companies in Cybersecurity, SaaS, or healthcare IT. Often, the limitations are a combination of both vertical and geographic. But in any case, this is again information that isn’t difficult to find out with a public search. So make sure to do your research to avoid wasting everyone’s time.

The VC is stretched too thin or sees too much work on their end

This is a topic that could come up early, or later on in discussions. If a sole founder comes to a VC with a great idea or prototype only, even the earliest stage investor may be put off because there is “too much yet to be done”. They may perceive the issues as “solvable”, but ones that will take too much of their own involvement and precious bandwidth to get through. In other cases the team and product may be farther along, but deep into investment discussions the investors may come to the conclusion that there are other factors (intra-team drama, need to lead follow on investments, market education/complexity, need to hire/replace many critical team members, etc.) that also may spread them too thin. VC’s want to help, but they aren’t employees or consultants.

This is also a common reason given when an investor doesn’t want to insult you. So they use this as a version of the old breakup line “It’s not you, it’s me”.

There is a conflict in their portfolio

This yet another area where research up front can be really helpful. However, it’s not always as straightforward as understanding the geographic or investment round focus of a fund.

That’s because software and hardware company founders SHOULD seek out investors who have previous experience and interest in their industry and category. After all, these are the most likely prospective investors to provide capital! But here’s the rub: they can be “too knowledgeable” and involved in your market segment, as they see your company as competitive to existing companies in their portfolio. Sometimes you do your research and don’t view the portfolio company as competitive, but the VC does. There is judgement involved here; also, the VC may have a much better idea about the their portfolio company’s future direction than you do.

Occasionally you will find venture capital funds that knowingly and openly invest in competitive businesses. This is the topic for another discussion. As a rule, I would avoid them.

There are risks here, as you could disclose information to an unscrupulous investor who only then tells you that they have a portfolio conflict. Sometimes this isn’t intentional; they may not realize the competitive situation in the beginning, especially if it’s a large fund.

This situation is often unavoidable, but you should do your best to do as much research as you can, so you can steer clear of obvious conflicts.

Your VC contact loves you and the deal, but he/she can’t convince the rest of the partnership

When you get this answer, there is usually one of several reasons. Again, if you’ve been talking to an associate, it may truly be the situation that he or she loves the deal, but the partners just don’t. And he doesn’t have the juice to convince them. Or in firms that require complete unanimity in their investment decisions, you might even be dealing directly with a partner but he just can’t convince the rest of the technology venture capital partnership. The final most likely possibility is that your contact doesn’t want to give you the real reason for saying “no” and is using the “partnership” sitting behind the curtain and invisible to you as the scapegoat for why you won’t be getting funding from them.

We’ve seen this before and it just won’t work

This is often the reason when your contacts at a technology venture capital firm appear early in the discussion to have a significantly negative attitude about the business’s prospects. Maybe they are put off because they see the business are far too capital intensive, based upon previous experience with a similar business. Maybe that can’t envision how the business will be able to scale. Or maybe they’ve seen other VC firms poor money into the category, and there just haven’t turned out to be any big exits. There are many different shades of this same story. But the bottom line is, when an investor has this type of attitude, it’s really about them and not you. There is usually little you will be able to do to convince them. In most cases it makes the most sense to cut bait early, protecting your IP and pursuing other potential investors.

The main takeaway to all of this is DO YOUR RESEARCH UPFRONT! Many reasons that an institutional investor will ultimate give for their “no” can be anticipated by talking with someone that knows the firm. In many of the instances outlined above, simply a short visit to the technology venture capital firm website will do the trick. It’s important to remember that while you’re going to get a lot of “no thanks” as you embark on this process, it’s important to limit them to the extent that you can for a number of reasons. Examples: you usually only get one chance with a technology venture capital firm, your time is precious in a startup and fundraising is a huge time sink, and limiting exposure of your intellectual property to the fewest amount of people possible are three important ones that come quickly to mind.

So that’s a short list of some of the more common reasons your tech startup will hear “no” from a perspective technology venture capital investor. This list is curated from my own fundraising experiences, as well as experiences of my clients over a great number of years. There are many more that I’m sure that readers can add to the list. Please do so in the comment field below. We appreciate you sharing your own stories and opinions on this topic of high interest to early stage software and hardware companies.

About Phil Morettini

Phil Morettini is the author of the Morettini on Management Tech Blog and President of PJM Consulting. Mr. Morettini has an extensive C-level software and hardware company executive background. PJM Consulting provides management consulting and interim management services to technology companies.